The Beluga Top Pick — Uniswap
Native Governance Token
6 Chains (Ethereum, Avalanche, etc)
- Governance token is UNI
- Supports six blockchain networks
- Over 200 DeFi integrations
- Over 72,000 liquidity providers
- The protocol is non-upgradable and designed to be censorship resistant
- No KYC required
- Because reserves are automatically rebalanced after each trade, a Uniswap pool can always be used to buy or sell a token — unlike traditional exchanges, traders do not need to match with individual counterparties to complete a trade
It allows users to earn crypto passively via liquidity pool participation
Has a user-friendly interface and design
Decentralized and trustless - allows users to retain control over their funds and reduces the risk of censorship
Its liquidity pools enable users to trade a wide range of ERC-20 tokens with sufficient liquidity - and anyone can earn a share of the trading fees generated
The open nature allows for the listing of any ERC-20 token without requiring a formal approval process and has played a significant role in the growth of the decentralized finance (DeFi) ecosystem by facilitating the trading of innovative tokens
Gas fees are high
Users are at risk of price slippage and impermanent loss - Uniswap's automated market maker model can lead to price slippage, especially when executing large trades
Liquidity providers are exposed to impermanent loss, which occurs when the value of their tokens in the pool diverges from simply holding them
The Ethereum blockchain, which has faced scalability challenges and network congestion during periods of high demand can result in increased transaction fees (gas fees) and slower transaction confirmation times
Lack of regulation a potential risk - as a decentralized exchange, Uniswap operates outside the realm of traditional financial regulations
Uniswap is one of the most popular and widely used decentralized exchange (DEX) platforms built on the Ethereum blockchain. It was launched in 2018 and has gained significant attention and adoption within the decentralized finance (DeFi) ecosystem. This DEX is one of the top Ethereum decentralized exchanges based on TVL (Total Value Locked).
Uniswap uniquely operates as an AMM (Automated Market Maker), which means it relies on liquidity pools and smart contracts to facilitate token swaps. Instead of relying on order books and traditional buyers/sellers, Uniswap allows users to trade ERC-20 tokens directly from these pools.
The nature of Uniswap makes it the ideal option for investors who want to swap/trade their ERC-20 tokens or ETH (Ethereum) with relatively low slippage and high liquidity. Furthermore, Uniswap offers liquidity providers rewards of up to 1% in fees based on the amount of capital in their pool relative to trades.
Uniswap's growth and adoption - which readied them for community led growth, development and self sustainability - brought about its own native governance token called UNI. Holders of UNI have the ability to participate in governance decisions, such as protocol upgrades, fee adjustments and the allocation of community treasury funds. UNI holders can also earn rewards through staking and liquidity mining programs.
In May 2021, Uniswap released version 3 of its protocol, introducing concentrated liquidity and multiple fee tiers. Version 3 offers enhanced capital efficiency and allows liquidity providers to have more control; however, this also requires more experience to accurately maintain price ranges and generate the most fees.
Uniswap is continuously evolving, and new features and improvements may be introduced over time.
Uniswap stands out as a top choice among decentralized exchanges for trading most desired tokens, although its fees are slightly elevated and its exclusive reliance on Ethereum can be a minor inconvenience. The project boasts a reputable team, substantial funding and a commitment to ongoing innovation, underpinned by secure, well-established smart contracts.
Who Can Sign Up?
Uniswap is best for investors who want to trade ERC-20-based tokens easily and earn high interest rates without liquidity mining.
Why Jump into This DEX?
Uniswap rewards its liquidity providers with a small portion of the transaction fees they take for trades, so traders will enjoy a mutually beneficial relationship as a Uniswap liquidity provider.
Uniswap supports trades on other blockchains besides Ethereum, such as Binance Smart Chain, Optimism, Celo, Arbitrum and Polygon.
Runner Up — SushiSwap
Native Governance Token
25 Chains (Ethereum, Polygon, etc)
- The native governance token is SUSHI
- Shush supports dozens of different blockchains
- Users experience faster token swap transactions
- High APY/APR for yield farming and liquidity pool participation
- Better personal privacy with no KYC required
Lower transaction fees - a significant advantage of Sushi as a DEX is its lower transaction fees compared to many other DEX platforms
Users can collect high yields while trading their crypto assets against various liquidity pools
Sushi incents users to lend their crypto assets to its liquidity pool to give them liquidity tokens as rewards
Team issues - The protocol has had a complicated history with the team. After the initial team members vampire attacked UniSwap, Chef Nomi (the anonymous founder) abandoned the project and left it for dead. The community brought it back to life but then it has suffered a host of issues with the management team getting caught up for having a large compensation package and minimal runway.
Users can suffer impermanent loss in Sushi liquidity pools, and so providing liquidity should only be done with great caution, by those with experience and only provide an amount a user is willing to lose.
The platform is not immune to security risks - they have experienced instances of hacking attempts, phishing attacks and smart contract vulnerabilities in the past
SushiSwap is a decentralized exchange (DEX) that originated on Ethereum but now operates on multiple chains including Arbitrum, Avalanche, Fantom, Polygon, Base, BSC and more. SushiSwap was started as a vampire attack on UniSwap, forking the code and launching as a pure play competitor, intending to suck the liquidity out of UniSwap. While they were initially successful, the team has had multiple controversies and internal issues which has marred their reputation and slowed down their execution speed. Despite these headwinds the team has done a good job in maintaining their position as one of the largest DEX platforms in TVL.
The native token is called Sushi and it plays a vital role in the ecosystem. Users can earn Sushi tokens by providing liquidity to the various liquidity pools available on the platform. Additionally, holding Sushi tokens provides various benefits such as reduced trading fees and participation in platform governance through voting rights.
Sushi also offers features and functions including:
- Swapping - swap one cryptocurrency for another by selecting the desired trading pair
- Liquidity provision - users can become liquidity providers by adding funds to the liquidity pools
- Yield farming - users earn additional tokens by staking their LP tokens in yield farming pools
- Staking pools - users can stake their Sushi tokens to earn more Sushi or other tokens
SushiSwap has emerged as a prominent player in the decentralized exchange (DEX) space, offering users the opportunity to participate in automated market making and liquidity provision. While it faced significant early challenges, including founder controversies and governance issues, the project has made strides in improving transparency and community engagement. SushiSwap continues to innovate in the DeFi sector, and its user-friendly features, liquidity pools and yield farming opportunities make it an attractive option for those seeking to trade and earn returns in the world of decentralized finance.
Who Can Sign Up?
Sushi is good for more seasoned crypto investors who want to earn rewards via yield farming. Whereas the user-friendly interface is helpful for everyone, beginners might experience more difficulties coming up to speed. Either way, many investors see Sushi as a promising long-term investment and it remains one of the largest DEX by volume and TVL.
Why Jump into This DEX?
One of the main reasons why someone might choose Sushi as a decentralized exchange (DEX) is its competitive advantage in terms of lower transaction fees and higher liquidity compared to many other DEX platforms. It can be helpful that Sushi is a DEX that functions on multiple chains including Ethereum. They offer low transaction fees, a user-friendly interface and an array of liquidity pools that allow users to yield farm for rewards. The platform is secure and many investors see its governance token as a potential long-term investment.
There are other things users can do on Sushi aside from yield farming and swapping their tokens, including staking and voting on protocol governance proposals. Interestingly, Sushi operates a bug bounty program, which rewards users who identify and report any security vulnerabilities on the platform.
Native Governance Token
10 Chains (Ethereum, Celo, etc)
- Stablecoin-focused decentralized exchange (DEX)
- Optimizes liquidity for stablecoin trading
- Reduces slippage and maximizes efficiency
- Specialized liquidity pools for stablecoins
- Low fees and high liquidity
- Supports multi-chain
- Stablecoin yield farming
- Governance token called Curve
Efficient and low-slippage stablecoin trading
Specialized liquidity pools for optimal stablecoin liquidity
Low fees and competitive rates
Non-custodial and decentralized
High liquidity for stablecoin pairs
Most of the big layer 2 scalability solutions can run on Curve Finance
Limited asset selection beyond stablecoins
Less variety in trading pairs
Potential for lower volume on non-stablecoin pairs
Dependency on the Ethereum network often with congestion and higher gas fees
Potential for smart contract risks
Its user interface is not as intuitive or easy to use as others
It is not the best for high-risk yield farmers because it focuses on stablecoins
Curve is a decentralized exchange (DEX) that specializes in efficient and low-slippage trading of stablecoins on the Ethereum network. It is designed to optimize liquidity for stablecoin trading pairs, providing users with competitive rates and minimal price slippage.
Curve operates on the Ethereum blockchain and utilizes automated market maker (AMM) algorithms to facilitate trades. Its primary focus is on stablecoin swaps, such as trading between different types of stablecoins or swapping stablecoins for other assets with minimal price impact.
Curve Finance is not an orderbook DEX. Users perform trades by directly swapping tokens in the liquidity pool. Ultimately, the pool is controlled by smart contracts making the protocol entirely trustless. These contracts ensure a continuous balance between the liquidity pool's demand and supply of various assets.
Curve is specifically designed for stablecoin trading. This specialization allows Curve to optimize its automated market maker (AMM) algorithms to minimize price volatility and ensure that users can exchange stablecoins at very close to the market rate.
Bottom line, the Curve Finance DEX provides high liquidity, ease of use and fast transactions, while collecting low transaction fees.
Curve DEX's appeal lies in its specialized focus on stablecoin trading, offering users low-slippage, low-fee transactions and high efficiency. This makes it a preferred choice for participants in the decentralized finance (DeFi) ecosystem seeking stability and precision in their cryptocurrency exchanges.
Who Can Sign Up?
Curve Finance is the ideal option for users who want to trade their stablecoins with low volatility. Investors who want to hedge their funds or assets against volatility and market fluctuation could choose Curve Finance.
Why Jump Into This DEX?
Curve's standout feature as a DEX is its strong support for stablecoins, which are cryptocurrencies tied to tangible assets like commodities or fiat currency. This specialized focus makes Curve a prime choice for yield farming, a common DeFi practice. Yield farmers typically face "impermanent loss" when asset prices change rapidly after they deposit into a DEX's liquidity pool, resulting in missed profit opportunities compared to keeping their tokens in wallets or other opportunities.
So, if they farm with stablecoins, they may not experience impermanent loss because stablecoins usually have low volatility. In addition, the transaction fees for trading stablecoins on Curve are quite low, so yield farmers are usually attracted to Curve.
Curve Finance uses an Automated Market Maker (AMM) algorithm and a liquidity pool to distinguish itself from other DEX platforms in the DeFi market. The DEX provides top-notch autonomy and security for its users. Specializing in stablecoins caters to users seeking precision and stability in their cryptocurrency exchanges,
Native Governance Token
10 Chains (Ethereum, zkSync, etc)
- Decentralized exchange (DEX) aggregator
- Optimizes trading rates across multiple DEX platforms
- Reduces slippage through path splitting
- Offers liquidity provision through 1inch Liquidity Protocol (1LP)
- A built-in wallet for staking and claiming rewards
- Typically furnishes great liquidity
- Low fees for trades and transactions
- Governance token is 1LP
Best rates from multiple DEXs
Reduced slippage and improved price execution
Wide range of supported tokens
Ability to earn rewards through liquidity provision
Non-custodial and decentralized trading experience
1inch is an aggregator that supports many blockchains, crypto assets and wallets
Complexity for beginners
Potential for higher gas fees on Ethereum
Limited control over specific DEX selection
Reliance on external DEX protocols
Potential for smart contract risks
Users cannot purchase crypto assets with fiat money on 1inch
Some beginner investors may find it difficult to use the platform because it is tailored for advanced investors
1inch is best at scouring multiple DEXs and finding the best deals for crypto trades, thanks to its routing algorithms. With 1inch, investors can glide through the DeFi landscape, effortlessly tapping into a sea of tokens and trading pairs while keeping costs low and trades slip-free.
1inch is basically a clever decentralized exchange aggregator that connects users to various decentralized exchanges (DEXs) to find the best available prices for their cryptocurrency trades. It utilizes smart routing algorithms to split orders across multiple DEXs, ensuring cost-efficiency and minimal slippage. 1inch's platform aims to provide users with optimal liquidity and access to a wide range of tokens and trading pairs within the DeFi ecosystem.
When a user initiates a trade on 1inch, the platform's algorithm scans multiple liquidity sources, including popular decentralized exchanges like Uniswap, SushiSwap and PancakeSwap, to find the most favorable rates. It factors in liquidity, fees and other parameters to determine the optimal trading route.
To achieve the best rates, 1inch employs a technique called "path splitting." This involves dividing the trade into smaller parts and executing each part on different DEX platforms to take advantage of the most liquid pools and competitive prices for specific tokens. This approach favorably impacts any slippage and maximizes the value obtained from the trade.
1inch also incorporates its own liquidity protocol, called 1inch Liquidity Protocol (1LP), which enables users to earn rewards by providing liquidity to the protocol. By staking assets, users can contribute to the liquidity pools and receive 1inch tokens as incentives.
Overall, 1inch is a cutting-edge decentralized exchange aggregator that empowers cryptocurrency users to discover the most favorable prices for their trades by seamlessly connecting them to various decentralized exchanges and splitting trades across various routes - optimizing price execution. Its sophisticated smart routing algorithms ensure cost-efficiency and minimal slippage, making it a go-to choice for accessing a diverse range of tokens and trading pairs in the decentralized finance (DeFi) realm.
Using this strategy may involve trading in more than one DEX, but the advantage is that it executes all of the trades on the 1inch platform directly.
1inch provides an intelligent and near instant guide through the complex world of cryptocurrency trading. Think of it as a personal concierge for decentralized exchanges (DEXs). With its advanced algorithms, 1inch hunts through the crypto landscape to score the best prices for trades, while also reducing trading costs and minimizing slippage. It's the ticket to a vast array of tokens and trading pairs in the exciting realm of decentralized finance (DeFi), making it a must-have tool for anyone navigating the crypto markets.
Who Should Sign Up?
1inch might be the best bet for traders who want to trade on DEX platforms that keep them from worrying about low liquidity while enjoying minimal transaction fees.
Why Jump Into This DEX?
1inch enables traders to execute token swaps through limit orders, which activate when the desired asset reaches a specified price. Importantly, users can source liquidity from other decentralized exchanges in the DeFi ecosystem without incurring extra fees. During the token swap process, 1inch efficiently navigates the DeFi landscape to access the most favorable liquidity sources available.
Aside from price aggregation, 1inch has a liquidity pool where users can earn rewards for providing liquidity. Users can also stake their 1inch tokens on the platform for rewards. In addition, 1inch has expanded beyond its initial Ethereum-based platform and now supports multiple blockchains, including Binance Smart Chain (BSC) and Polygon (formerly Matic). This allows users to access a wider range of liquidity and trade on different chains using the 1inch aggregator.
Questions & Answers
Q. How Do DEXs Work?
A. DEXs operate and provide:
- Peer-to-Peer Trading: DEXs facilitate direct, peer-to-peer cryptocurrency trading, eliminating the need for intermediaries like centralized exchanges.
- No Central Authority: DEXs operate without a central authority, relying on blockchain technology and smart contracts to automate and secure transactions.
- User Wallets: Users connect their cryptocurrency wallets to the DEX, allowing them to control their funds and execute trades directly.
- Order Book or AMM: DEXs either use order books (matching buyers and sellers) or automated market makers (AMMs) to enable trades.
- Smart Contracts: Trades are executed through smart contracts, which automatically process and settle transactions according to predefined rules.
- Decentralized Liquidity: DEXs rely on user-contributed liquidity pools, where traders can swap their assets, and liquidity providers earn fees for their contributions.
- Reduced Custodial Risk: Since users retain control of their assets in their wallets, the risk of hacks or security breaches like at a central exchange is minimized.
- Transparency: Transactions on DEXs are recorded on a public blockchain, providing transparency and verifiability.
- Anonymity: Users can trade on DEXs with a degree of anonymity, as they do not need to undergo the same level of Know Your Customer (KYC) procedures as on centralized exchanges.
- Cross-Chain Trading: Some DEXs support cross-chain trading, allowing users to trade assets from different blockchains without the need for a centralized intermediary.
- Token Compatibility: DEXs typically support a wide range of tokens, including popular cryptocurrencies, stablecoins and less common tokens.
- Lower Trading Fees: DEXs often have lower trading fees compared to centralized exchanges, as they do not require the same infrastructure and costs from intermediaries.
- Global Access: DEXs are accessible to users worldwide, offering a more inclusive way to trade cryptocurrencies.
- Security Emphasis: Security is paramount in DEXs, as vulnerabilities in smart contracts or the underlying blockchain can lead to exploitations and losses.
- Front-End Interfaces: Users interact with DEXs through web interfaces or dedicated apps that connect to the underlying blockchain.
Q. What are the different types of Decentralized Exchanges:
A. There are different types of decentralized exchanges that operate on various blockchain networks and employ different mechanisms for facilitating decentralized trading. Here are some common types of DEX platforms:
- Central Limit Order Book (CLOB): These function similarly to traditional centralized exchanges by using order books to match buy and sell orders. They allow users to create limit orders and specify their desired price and quantity. While the CLOB structure was popular with early DEX versions, advancements have largely been focused on the AMM model. Examples include dYdX and IDEX.
- Automated Market Maker (AMM). An AMM DEX utilizes liquidity pools and algorithms instead of order books to facilitate trading. Liquidity providers deposit their funds into pools, and trades are executed based on pre-set mathematical formulas. Uniswap and PancakeSwap are popular AMM DEX platforms.
- Hybrid. A Hybrid DEX takes parts of both AMMs and CLOBs to make a sum that is greater than the parts. For example, an AMM DEX can implement an order book to make cross chain swaps possible. There has also been a recent surge in popularity for Central Limit Order Book infrastructure protocols such as Sei Network upon which a DEX could launch, furthering the possibilities of DEX performance.
Q. How Can I Get Started With a DEX?
A. Here are the steps for when a trader is ready to jump in:
- Set up a digital wallet that is compatible with the blockchain network on which the DEX operates. Popular options include MetaMask, Trust Wallet or Ledger Live.
- Obtain the desired cryptocurrencies to trade on the DEX. They can be purchased from a centralized exchange, using a peer-to-peer trading platform or transfer them from another wallet. Make sure the cryptocurrencies are compatible with the targeted or planned DEX.
- Explore different DEX platforms and consider factors such as security, supported cryptocurrencies, liquidity, fees, user interface and reputation by … using the guidance in this article for one. Ensure the DEX of choice is compatible with the digital wallet and the cryptocurrencies held.
- Connect the digital wallet to the selected DEX through the DEX's site, executing the connection following their specific instructions.
- Transfer the desired cryptocurrencies from the wallet to the DEX. This involves initiating a cryptocurrency transfer from the connected wallet to the DEX's designated wallet address.
- Execute trades - with the wallet connected and funded, traders can then engage in trades on the DEX. Select the trading pair to be traded, enter the desired amount and price, then submit the transaction. Transactions on DEXs are typically executed directly on the blockchain through smart contracts.
- Confirm and track the transaction(s) details on the wallet interface.
- Manage the assets in the personal wallet which will reflect the updated balance of traded assets. Traders can choose to hold the assets in their wallet or transfer them back to another wallet for long-term storage.
Q. Will I Pay Taxes for Transacting on my Chosen DEX?
A. Tax regulations regarding decentralized exchanges and cryptocurrency transactions vary by jurisdiction, and it's essential to consult with a tax professional or become familiar with the specific tax laws in a specific country.
General considerations regarding taxes when using a DEX may include: Capital gains, reporting obligations, airdrops, forks, rewards, lottery winnings and promotional rewards, to name a few. It's crucial to maintain accurate records of all DEX transactions, including purchase prices, sale prices and the specific tokens involved. Keeping track of this information can help accurately calculate all gains or losses and in order to fulfill tax reporting obligations. Refer to Beluga's article on Crypto Tax Software to find comprehensive support on the issue
It's worth emphasizing - due to the complexities and evolving nature of cryptocurrency taxation, it's highly recommended to consult with a tax professional who specializes in cryptocurrencies and understands the regulations in a specific country.
Q. Does the IRS (in the US) Get the Reports of Decentralized Exchanges?
A. Traders interact with decentralized exchanges through non-custodial wallets. Normally, these wallets do not report to the IRS as opposed to centralized exchanges that do report.
Q. Is There a DEX That Does Not Charge Transaction Fees?
A. Every DEX has a fee for facilitating users' transactions and trades. However, some DEX platforms may give users discounts when using certain liquidity pools. Generally, the transaction fees for a DEX is much lower than those for CEXs. Some charge as low as 0.04%.
Q. Which DEX is Best for Beginners?
A. The best DEXs for beginners are Uniswap and PancakeSwap. These decentralized exchanges have simple user interfaces and designs, making them easy for beginners.
Q. Which Decentralized Exchange is the Cheapest?
A. Technically speaking, 1inch, the DEX price aggregator is the cheapest. It can help crypto traders find the best prices for assets and lowest fees for trades by running through all the DEXs on the DeFi ecosystem.
Q. Are Decentralized Exchanges Legal?
A. DEX platforms operate in a legal gray area in many jurisdictions, as the regulatory landscape surrounding cryptocurrencies and decentralized finance (DeFi) is still evolving. The legality of a DEX depends on various factors, including the specific jurisdiction and the activities conducted on the platform.
It's important to note that while DEXs themselves may not be inherently illegal, the activities conducted on them, such as trading illegal or prohibited assets, can be illegal and subject to enforcement actions.
As regulations continue to develop, governments and regulatory bodies are paying more attention to decentralized exchanges and taking steps to establish frameworks for their operation. It is advisable to stay informed about the legal and regulatory requirements in a specific jurisdiction and consult with legal professionals for accurate and up-to-date information.
Q. Are Decentralized Exchanges Safe to Use?
A. Decentralized exchanges offer certain safety advantages, but it's important to be aware of potential risks.
A DEX provides a safe option for users to retain control of their funds, eliminating the counterparty risks that were seen with centralized entities like FTX and Celsius. Also, safety is enhanced as transactions on a DEX are recorded on the blockchain, providing a transparent and immutable transaction history. Maybe best of all, there is also no single point of failure - a DEX is decentralized, meaning there is no central point of vulnerability that can be targeted by hackers.
Risks involve the reliance on smart contracts. Vulnerabilities in these contracts can be exploited by malicious actors. Users should exercise caution and do proper research before interacting with any DEX platform. A DEX also operates in a less regulated environment compared to centralized exchanges. While this can provide freedom, it also means less protection and recourse if something goes wrong. Lastly, there is the possibility of user error. As users retain control of their funds, mistakes in handling wallets, private keys or transactions can result in loss of funds. It's important to follow security best practices and exercise caution.
It cannot be emphasized enough - of utmost importance is ensuring the safe keeping of one's private keys and seed phrases.